A Surprising Winner in the Apple-Samsung Fight

by Conrad de AenlleFebruary 01, 2013

Samsung may end up being a two-time loser in its legal battle with
Apple (AAPL), and a big winner may turn out to be Taiwan Semiconductor
Manufacturing Co. (TSM). Patrick Liao, who follows Taiwan technology
stocks for Nomura Equity Research, predicts that Apple, which was
awarded $1.05 billion in its patent-infringement suit against Samsung
last August, will shift its sourcing of 20-nanometer application
processors – a key component in devices like the iPhone and iPad –
away from the Korean company in favor of suppliers in Taiwan, where
Taiwan Semi is the industry leader.

“With the increasing conflicts between Apple and Samsung in
smartphones and tablets, we have seen Apple gradually reduce its
component reliance on Samsung (e.g., display, memory) over time,” Liao
writes in a note to Nomura clients. “We understand APs remain Apple’s
largest component exposure to Samsung. . . . We think Apple will
strategically move its AP foundry business from Samsung to [Taiwan
Semiconductor] starting from 20 nanometers. With the foundry shift, we
expect [other] supply chain shift[s] as well, making this a
significant migration of the global semiconductor landscape.”

Boiling it down, he estimates that Taiwan Semi, which provided $6.37
of components to each iPhone 4 handset – the “addressable dollar
content” – and $7.22 to the iPhone 5, will be responsible for
components worth $19.08 per handset when the next generation of iPhone
comes along, thanks to the 20-nanometer processor. He bases his
forecast on surveys of chipmakers conducted by Nomura researchers.
Liao expects the proportion of Taiwan Semi’s business provided by
Apple to rise to 11.9% from 9.2%.

Taiwan Semiconductor’s stock has performed strongly over the last five
years, even with the business that it already has from Apple. As the
chart below shows, its total return of 117.3% is substantially better
than that of such peers as Marvell Technology (MRVL), Broadcom (BRCM),
Semiconductor Manufacturing International (SMI) and United
Microelectronics (UMC). Broadcom is the only one other than Taiwan
Semi not to have lost shareholders money during the period, as seen in a stock chart.

Despite the vastly superior performance, Taiwan Semi remains cheap
compared to all but Marvell, whose PE ratio of 16.4 is
moderately lower than Taiwan Semi’s 17.9 PE ratio. The others range from
19.5 to infinity; SMI is unprofitable, so its PE is not meaningful.

The new business that Liao foresees is enough to persuade him to raise
his target price for Taiwan Semi’s stock from 105 new Taiwan dollars
to 120. That works out to $20.22 for its American depositary receipts
listed in New York, or about 12% higher than the closing price on
Friday of $18.07.

The company’s valuation also seems reasonable, relative to the
industry, based on consensus views of the future. Taiwan Semi’s
forward PEG ratio, calculated by dividing the PE ratio by forecast
annual earnings growth, is 1.2. Among the other four, only Broadcom’s
is lower, meaning cheaper. If Liao is right and Apple becomes a
substantially bigger customer over the next year or so, then earnings
expectations for Taiwan Semi could go higher, bringing its valuation
down even more.

Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at editor@ycharts.com.